Justices Add to Tools Against Insurer Fraud

WASHINGTON — The Supreme Court gave consumers a powerful legal weapon against fraud in the insurance industry Wednesday, ruling that the insurers can be sued for damages under the federal anti-racketeering law.

Until now, most courts had said that insurers are governed by state regulation and are immune from federal lawsuits.

However, in a unanimous decision, the justices cleared the way for 84,000 policyholders in Nevada to sue the giant health insurer Humana Inc. over allegations of a secret kickback scheme that allowed the company to reap huge profits.

The policyholders were promised that Humana Health Insurance would pay 80% of a hospital bill, while they would pay 20%. But, they said, they often paid more than the insurance firm. Through secret deals with Humana-owned hospitals, the insurer got a significant discount on its charges while the bills to beneficiaries were unchanged, according to the lawsuit.

Such systematic fraud would violate the federal anti-racketeering law, the Racketeer Influenced and Corrupt Organizations Act of 1970, lawyers for the Humana policyholders maintained.

Humana, in a statement, said that its conduct “has been both legal and ethical.”

Individuals who clash with their insurance company or health care provider are not likely to benefit from the ruling, the lawyers said. A separate federal law governing pensions and benefits has been interpreted to block most individual damage claims involving medical benefits.

But Wednesday’s ruling likely will spur more class-action suits involving thousands of policyholders.

“There is widespread insurance fraud in this country,” charged Sarah Posner, an attorney for the Trial Lawyers for Public Justice in Washington. “And there is no reason why insurance companies should be immune from liability under the 1970 law. But you need an extraordinary case of systematic fraud.”

A national group representing state insurance regulators joined the trial lawyers organization and the Clinton administration in urging the broader user of the anti-racketeering law. “Our view is that this can be a valuable tool for fighting insurance fraud,” said Ross Myers, a senior counsel for the National Assn. of Insurance Commissioners in Kansas City.

Congress passed the racketeering law to combat organized crime. It gave prosecutors and private lawyers the right to obtain triple damages against “any enterprise . . . engaged in a pattern of racketeering activity.” This was defined to include not only mob crimes such as extortion and murder but also fraud.

During the 1980s, the law gained public attention when it was used widely against those accused of various stock frauds.

Although some states allow damage suits against insurance firms, others do not and instead rely on regulators to deal with complaints of fraud. For lawyers, the anti-racketeering law is considered a strong weapon because of its triple awards proviso. The same statute also permits U.S. attorneys to bring criminal charges against the fraudulent operations.

For more than 50 years, the business of insurance has had a special status in the law.

Congress and state officials historically have believed that insurance works best for consumers if it is closely regulated. The McCarran-Ferguson Act of 1945 gave state officials control of the industry. It said that the federal government will take no action “to impair or supersede any law enacted by any state for the purpose of regulating the business of insurance.”

Citing this law, a federal judge in Las Vegas threw out the lawsuit against Humana Health Insurance.

The U.S. 9th Circuit Court of Appeals revived the lawsuit in 1997 and ruled that the racketeering law claim is not preempted by the McCarran-Ferguson Act.

The Supreme Court sided with the 9th Circuit in the case (Humana Inc. vs. Forsyth 97-303). Allowing such claims to go to court will not “impair” the state’s authority to regulate the insurance industry and indeed it may help, said Justice Ruth Bader Ginsburg for the court.

The Humana case has not been tried. After nearly a decade of preliminary litigation, Will Kemp, a Las Vegas attorney for the policyholders, said that he hopes the trial can begin this summer.